Thursday, August 20, 2020

Price Discovery for a New App? – A Trial of the FairPay Strategy Begins

What is the right price for an entirely new application? What if customer needs are diverse and the value is not yet clear? What if functionality and features are being expanded? What if the customer base is potentially large, but you are starting small?

A Dutch firm in the construction industry is trying a transformative new way to sort that out. They have been developing a new app to enable contractors and homeowners to manage any home renovation project. Their pre-market survey of potential customers showed a wide variation in willingness to pay, and it was unclear how to segment the market. They learned of FairPay, a radically new strategy for value-based price discovery, and decided to try that for their beta test. FairPay may also prove to be attractive for them on an ongoing basis, but in any case, it offers unique power for price discovery for a new service.

FairPay has been recognized as having broad potential to change the way subscription and service relationships work, but many businesses have been waiting for proof of concept testing before they would try it. This is the first real-world trial of how FairPay can work in a scalable way.

How to price a new app?

The original thought was to price the service at €2,50 a day per active project, but there were questions of whether that price point -- and that value metric -- were right, and whether the right answer might vary by customer segment. They had acquired 350 interested leads -- 30% of the interviewed leads confirmed the price level they had in mind as reasonable, but 30% said it was expensive, and 40% said they first want to experience the power of the app before having an opinion about the value and price. It was not clear what to do.

Hugo van Schaik and Floris Meulensteen, of the RenovationApp reviewed their dilemma with a consultant, Tijs Rotmans at The Pricing Company, and he suggested they try FairPay. They contacted me for advice, since I had developed and written about the concepts of FairPay (and had offered to assist with trials).

On our first Zoom call, I was impressed that they had read my book and already had a good understanding of the strategies. It was apparent that this was a well-conceived beta test of both their RenovationApp and of FairPay and so I was happy to begin working with them. As we were speaking, they got word that their board had approved their 6-month beta test plan for the MVP version of the product, and they began to move ahead with FairPay for that.

Why FairPay?

The introduction of digital services has changed the basic assumptions of economics. The marginal cost of providing a digital content or application service to an additional customer becomes negligible, but the investment in creating, supporting, and expanding that content or application service is high. So now neither businesses nor customers have any clear sense of what the right price should be. Cost-based pricing does not work and there is not yet any competition to base a price on (whether sensibly or not). Value-based pricing is the answer, but it still takes the combined perspective of the supplier and the customer to know what that value (and thus the price) should be. People are coming to see that what is needed is a new kind of relationship-based "social contract:" the idea that the customer is not really paying for their access to the current service, but to sustain a continuing supply of content, support, and enhancements. If they are willing to pay now to fund future services, then the business is sustainable. This is already becoming clear in content and other Passion Economy businesses.

This requires transparency and trust, but that is not really cause for concern when the relationship is structured effectively. Modern behavioral economics has led to the recognition that humans have been bred for fairness and reciprocity in social relationships and that that can be harnessed in business as well. In many ways FairPay revives the norms of the traditional village market, where prices were individually worked out to address the needs of both parties in the relationship. High-end B2B services already rely on value-based pricing as best practice. FairPay offers a framework that combines old and new ways to do that at scale that works for digital relationships – for SMB and consumer services.

FairPay as a price discovery engine

In his introductory emails to me on June 18-19, Floris had put their situation this way:
A renowned Dutch price strategist reviewed our case, and he suggested to take a look at the work you have done, regarding a FairPay price strategy. We really got interested in this way of working - mostly because our app doesn’t exist yet and it seems like the best thing to do as we launch our MVP. We will welcome more customers, develop a better relationship with those customers, which will result in a longer customer lifetime and higher customer life time value. And we will be able to learn a lot during the 6 months FairPay beta period.
… we expect to have the ready product live in August. We plan to do a phased roll-out to our evangelist testers, then testers, then live connection with new facebook campaigns for new leads. After we learned during the 6 months FairPay beta period, we will adjust the product, features and pricing (price point and price strategy) accordingly. Once mature, we will roll out to the active customers base that we have in other business units of the group we work for.
…We want to use FairPay for the first couple of versions of the RenovationApp. If we see a positive change in our business case, it can be that we keep using your model for a longer period. The main goal of using FairPay is to learn more about our target group, their (online) behaviour and what buyer persona's value the app the most. We let our users try our app for one project (around 6 weeks) and after that, we will send them to a form where they can pay a fair price. If they offer an unfair price for the upcoming 2 projects, they will go back to a fixed price and get kicked out of the FairPay zone. We will keep adding features to the app for premium users that pay a higher price.
We had a very productive call on June 23 and reviewed some of their questions and I agreed to work with them informally (at no charge). We began with a review of the framing and choice architectures they are developing for the initial launch. (I also contacted my colleagues in academia with whom I co-authored journal papers on FairPay, who were pleased at this news. They are hopeful that we can consider a rigorous comparative test of FairPay versus conventional set-price models, with and without free trials, after the beta test provides initial results on what pricing metrics and levels work for which customer segments.)

The beta test began August 1, and soon after that we had another call to review initial versions of how they were presenting this to customers. I was again pleased with their approach and made some additional suggestions. Some of this can be seen in their page on pricing, which includes an FAQ (this Google translation of the original Dutch is awkward, but workable).

My expectation is that FairPay will not only be effective for initial price discovery but will also prove to be the superior strategy for the long term. If it is effective at finding what works for a diverse set of customers and contexts during the beta, why stop? Customer needs and contexts will change, and product features will evolve, so why lock in price levels when you can use FairPay to continue this adaptive discovery process? Some customer segments may not behave well, and will need to have pre-set prices imposed to prevent free-riding, but with customers who can be enticed to be supportive, FairPay can be the basis of a very effective long term partnership that builds shared value.

In any case, the attractions of FairPay for this initial discovery phase seem compelling. I look forward to assisting as it develops, and to reporting on the findings.

------------------------

To stay updated and interact with others interested in FairPay, please join the LinkedIn group, “FairPay: Adaptively Win-Win Customer Relationships.” 


------------------------

More about FairPay

A brief introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"
(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)

2 comments: